Netflix to get Disney films in TV distribution deal

(Reuters) - Walt Disney gave a much needed boost to Netflix, becoming the first major Hollywood studio to use the video service to bypass premium channels like HBO that traditionally controlled the delivery of movies to TV subscribers.

News of the deal, which enables Netflix to stream Disney's first-run movies to its subscribers, boosted Netflix shares by 14 percent.

Investors saw the Netflix-Disney deal as an important endorsement of the DVD rental and streaming service, which has been struggling with slowing subscriber growth and higher costs for content distribution.

Disney movies will be available for streaming on Netflix starting in 2016, after its current deal with Liberty Media's pay-TV channel Starz expires. The deal is for both new Disney movies and library content such as "Dumbo" and "Alice in Wonderland."

But some analysts worried that Netflix paid too much to get Disney's movies. Tony Wible, an analyst with Janney Montgomery Scott, estimated in a report that Netflix paid more than $350 million a year for Disney's movies and said "we would not be surprised if (Netflix) would need to raise capital".

By comparison, HBO agreed to pay an estimated $200 million annually in its so-called "output," or movie licensing deal, with 20th Century Fox earlier this year, according to the Los Angeles Times.

The deal gives Netflix streaming rights to movies from Disney's live-action and animation studios, including those from Pixar, Marvel, and the recently acquired Lucasfilm. On October 30, Disney announced a $4 billion deal to purchase the famed studio founded by George Lucas, which will now make new episodes in the blockbuster "Star Wars" series.

"This deal brings to our subscribers some of the highest quality, most imaginative family films being made today," Ted Sarandos, Netflix's chief content officer, said in a statement. "It's a leap forward for Internet television."

DREAMWORKS EXCLUDED

Movies from Steven Spielberg's DreamWorks Studios are not included in the deal, as that studio distributes its movies through CBS's Showtime on TV. Disney recently signed a deal to distribute DreamWorks' films theatrically after the studio's deal with Viacom's Paramount Pictures expired.

The deal allows Netflix to stream Disney movies beginning seven to nine months after they appear in theaters, as Starz does now under Disney's prior agreement. The deal does not cover DVD rentals of Disney movies.

Disney said in November that it would shut down its own video streaming service, Disney Movies Online, which had failed to catch on with users. A message on the 'Disney Movies Online' website said it would shut down on December 31.

Netflix, which started its streaming business with mostly older films, has been moving to add more original programming and produces TV shows such as "Lilyhammer," which stars "Sopranos" actor Steven Van Zandt as an American gangster who starts a new life in Norway. The company also struck a high-profile deal with actor Kevin Spacey for "House of Cards."

The Disney pact follows similar deals Netflix has inked for new films with smaller studios, including Relativity Media, The Weinstein company and DreamWorks Animation.

The agreements have saddled Netflix with nearly $5 billion in contractual commitments over the next three years for deals its made for streaming content, the company said in a recent quarterly earnings report.

Netflix's struggles over the last year, which have included missed subscriber guidance, an ill-fated attempt to split the DVD and streaming operations, and a swooning stock price, recently attracted the attention of billionaire activist investor Carl Icahn.

Icahn disclosed in regulatory filings on October 31 that he had amassed a nearly 10 percent stake in the video company and suggested it should pursue a sale. Netflix responded by adopting a poison pill defense.

Losing Disney's movies means Starz is left with only Sony Pictures for film content. The pay-TV channel cast the ending of its agreement with Disney as its decision, saying it preferred to use the money for original programming creation.

Liberty Media's shares will "rebound," said Vijay Jayant, an analyst with International Strategy and Investment Group.

"We believe it was Starz' decision to remain prudent and walk away from the bidding for Disney content," ISI said in a report, estimating that it might have cost Starz $400 million to keep the movies.

Without that expense, Starz can step up its production of original series such as "Spartacus" and "Magic City," which ISI said have become more valuable to cable operators anyway.